Lesson 10 International Accounting Lelio Bigogno, Stefano Santucci

Transcription

1 Università degli studi di Pavia Facoltà di Economia a.a Lesson 10 International Accounting Lelio Bigogno, Stefano Santucci 1

2 IAS/IFRS: IFRS 3 Business Combination 2

3 History of IFRS 3 April 2001 Project carried over from the old IASC July 2001 Project added to IASB agenda 5 December 2002 Exposure Draft Business Combinations and related exposure drafts proposing amendments to IAS 36 and IAS March 2004 IFRS 3 Business Combinations and related amended versions of IAS 36 and IAS 38 - FRS 3 supersedes IAS 22 1 April 2004 Effective date of IFRS 3 29 April 2004 Exposure Draft of Proposed Amendments to IFRS 3 Combinations by Contract Alone or Involving Mutual Entities After considering comments on this ED, the Board decided to include the issues addressed in the ED in the 30 June 2005 exposure draft. 25 June 2005 Exposure Draft of Proposed Amendments to IFRS 3 3

4 History of IFRS 3 10 January 2008 Revised IFRS 3 (2008) issued. Click for Information about the 2008 revisions to IFRS 3 (2008) 1 July 2009 Effective date of IFRS 3 (2008) 6 May 2010 IFRS 3 amended for Annual Improvements to IFRSs December Amended by Annual Improvements to IFRSs Cycle(contingent consideration) - applicable for BC for which acquisition date is on or after 1 July December Amended by Annual Improvements to IFRSs Cycle (scope exception for joint ventures) - Effective for annual periods beginning on or after 1 July 2014 AMENDEMENTS UDER CONSIDERATION BY IASB Common Control Transactions Post-implementation review - IFRS 3 4

5 Key Definitions Business combination : A transaction or other event in which an acquirer obtains control of one or more businesses. Transactions sometimes referred to as 'true mergers' or 'mergers of equals' are also business combinations as that term is used in [IFRS 3] Business : An integrated set of activities and assets that is capable of being conducted and managed for the purpose of providing a return in the form of dividends, lower costs or other economic benefits directly to investors or other owners, members or participants Acquisition date:the date on which the acquirer obtains control of the acquiree Acquirer: The entity that obtains control of the acquiree Acquiree :The business or businesses that the acquirer obtains control of in a business combination 5

6 Scope IFRS 3 mustbeapplied when accounting for business combination 6

7 Scope butdoesnotapplyto: The formation of a joint venture* The acquisition of an asset or group of assets that is not a business, although general guidance is provided on how such transactions should be accounted for * Annual Improvements to IFRSs Cycle, effective for annual periods beginning on or after 1 July 2014,amends this scope exclusion to clarify that is applies to the accounting for the formation of a joint arrangement in the financial statements of the joint arrangement itself 7

8 Scope Combinations of entities or businesses under common control (the IASB has a separate agenda project on common control transactions) Acquisitions by an investment entity of a subsidiary that is required to be measured at fair value through profit or loss under IFRS 10 Consolidated Financial Statements. 8

9 Determining when a transaction is a BC IFRS 3 provides additional guidance on determiningwhether a transaction meets the definition of a business combination 9

10 Determining when a transaction is a BC This guidance includes: Business combinations can occur in various ways, such as by transferring cash, incurring liabilities, issuing equity instruments (or any combination thereof), or by not issuing consideration at all (i.e. by contract alone) 10

11 Determining when a transaction is a BC Business combinations can be structured in various ways to satisfy legal, taxation or other objectives, including one entity becoming a subsidiary of another, the transfer of net assets from one entity to another or to a new entity 11

12 Determining when a transaction is a BC The business combination must involve the acquisition of a business, which generally has three elements: 12

13 Determining when a transaction is a BC Inputs an economic resource (e.g. noncurrent assets, intellectual property) that creates outputs when one or more processes are applied to it Process a system, standard, protocol, convention or rule that when applied to an input or inputs, creates outputs (e.g. strategic management, operational processes, resource management) Output the result of inputs and processes applied to those inputs. 13

14 Method of Accounting for Business Combinations Acquisition method The acquisition method is used for all business combinations. 14

15 Method of Accounting for Business Combinations acquisition method Steps in applying the acquisition method: 1. Identification of the 'acquirer' the combining entity that obtains control of the acquiree; 2. Determination of the 'acquisition date' the date on which the acquirer obtains control of the acquiree; 3. Recognition and measurement of the identifiable assets acquired, the liabilities assumed and any non-controlling interest (NCI, formerly called minority interest) in the acquiree; 4. Recognition and measurement of goodwill or a gain from a bargain purchase 15

16 Method of Accounting for Business Combinations Acquisition method The acquirer is usually the entity that transfers cash or other assets where the business combination is effected in this manner 16

17 Method of Accounting for Business Combinations Acquisition Method If the guidance in IFRS 10 does not clearly indicate which of the combining entities is an acquirer, IFRS 3 providesadditional guidance which is then considered. 17

18 Method of Accounting for Business Combinations Acquisition Method The acquirer is usually the entity that transfers cash or other assets where the business combination is effected in this manner 18

19 Method of Accounting for Business Combinations Acquisition Method The acquirer is usually, but not always, the entity issuing equity interests where the transaction is effected in this manner, however the entity also considers other pertinent facts and circumstances including: relative votingrights in the combined entity after the business combination the existence of any ilarge minority interest if no other owner or group of owners has a significant voting interest the compositionofthe governingbody and senior management of the combined entity the terms on which equity interests are exchanged 19

20 Method of Accounting for Business Combinations Acquisition Method The acquirer is usually the entity with the largest relative size (assets, revenues or profit) For business combinations involving multiple entities, consideration is given to the entity initiating the combination, and the relative sizes of the combining entities 20

21 Method of Accounting for Business Combinations Acquisition Method Acquisition date An acquirer considers all pertinent facts and circumstances when determining the acquisition date, i.e. the date on which it obtains control of the acquiree. The acquisition date may be a date that is earlier or later than the closing date. 21

22 Method of Accounting for Business Combinations Acquisition Method IFRS 3 does not provide detailed guidance on the determination of the acquisition date and the date identified should reflect all relevant facts and circumstances. 22

23 Method of Accounting for Business Combinations Acquisition Method Considerations might include, among others, the date a public offer becomes unconditional (with a controlling interest acquired), when the acquirer can effect change in the board of directors of the acquiree, the date of acceptance of an unconditional offer, when the acquirer starts directing the acquiree's operating and financing policies, or the date competition or other authorities provide necessarily clearances. 23

24 Method of Accounting for Business Combinations Measurement of acquired assets and liabilities. IFRS 3 establishes the following principles in relation to the recognition and measurement of items arising in a business combination: Recognition principle. Identifiable assets acquired, liabilities assumed, and non-controlling interests in the acquiree, are recognised separately from goodwill Measurementprinciple. All assets acquired and liabilities assumed in a business combination are measured at acquisition-date fair value. 24

25 Method of Accounting for Business Combinations Acquisition Method Exceptions to the recognition and measurement principles The following exceptions to the above principles apply: Contingent liabilities the requirements of IAS 37 Provisions, Contingent Liabilities and ContingentAssets do not apply to the recognition of contingent liabilities arising in a business combination Income taxes the recognition and measurement of income taxes is in accordance withias 12 Income Taxes Employee benefits assets and liabilities arising from an acquiree's employee benefits arrangements are recognised and measured in accordance with IAS 19 Employee Benefits (2011) Indemnification assets - an acquirer recognises indemnification assets at the same time and on the same basis as the indemnified item Reacquired rights the measurement of reacquired rights is by reference to the remaining contractual term without renewals Share-based payment transactions - these are measured by reference to the method in IFRS 2 Share-based Payment Assets held for sale IFRS 5 Non-current Assets Held for Sale and Discontinued Operations is applied in measuring acquired non-current assets and disposal groups classified as held for sale at the acquisition date. 25

26 Method of Accounting for Business Combinations Acquisition Method In applying the principles, an acquirer classifies and designates assets acquired and liabilities assumed on the basis of the contractual terms, economic conditions, operating and accounting policies and other pertinent conditions existing at the acquisition date 26

27 Method of Accounting for Business Combinations Acquisition Method For example, this might include the identification of derivative financial instruments as hedging instruments, or the separation of embedded derivatives from host contracts. 27

28 Method of Accounting for Business Combinations Acquisition Method For example, this might include the identification of derivative financial instruments as hedging instruments, or the separation of embedded derivatives from host contracts. 28

29 Method of Accounting for Business Combinations Acquisition Method However, exceptions are made for lease classification (between operating and finance leases) and the classification of contracts as insurance contracts, which are classified on the basis of conditions in place at the inception of the contract. 29

30 Method of Accounting for Business Combinations Acquisition Method Acquired intangible assetsmustbe recognised and measured at fair value in accordance with the principles if it is separable or arises from other contractual rights, irrespective of whether the acquiree had recognised the asset prior to the business combination occurring NB: This is because there is always sufficient information to reliably measure the fair value of these assets. 30

31 Method of Accounting for Business Combinations Measurement NCI (Non-controlling interest) IFRS 3 allows an accounting policy choice, available on a transaction by transaction basis, to measure NCI either at: fair value (sometimes called the full goodwill method), or the NCI's proportionate share of net assets of the acquiree. 31

32 Method of Accounting for Business Combinations The choice in accounting policy applies only to present ownership interests in the acquiree that entitle holders to a proportionate share of the entity's net assets in the event of a liquidation (e.g. outside holdings of an acquiree's ordinary shares). 32

33 Method of Accounting for Business Combinations Other components of non-controlling interests at must be measured at acquisition date fair values or in accordance with other applicable IFRSs (e.g. share-based payment transactions accounted for under IFRS 2 Share-based Payment). 33

34 Method of Accounting for Business Combinations Example: P pays 800 to purchase 80% of the shares of S. Fair value of 100% of S's identifiable net assets is 600. If P elects to measure noncontrolling interests as their proportionate interest in the net assets of S of 120 (20% x 600), the consolidated financial statements show goodwill of 320 ( ). If P elects to measure noncontrolling interests at fair value and determines that fair value to be 185, then goodwill of 385 is recognised ( ). 34

35 Method of Accounting for Business Combinations The fair value of the 20% noncontrolling interest in S will not necessarily be proportionate to the price paid by P for its 80%, primarily due to control premium or discount as explained in paragraph B45 of IFRS 3. 35

36 Goodwill Goodwill is measured as the difference between: the aggregate of (i) the acquisition-date fair value of the consideration transferred, (ii) the amount of any NCI, and (iii) in a business combination achieved in stages the acquisition-date fair value of the acquirer's previously-held equity interest in the acquiree; and the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed (measured in accordance with IFRS 3). 36

37 Goodwill Goodwill = Consideration transferred + Amount of non-controlling interests+ Fair value of previous equity interests- Net assets recognised 37

38 Goodwill If the difference above is negative, the resulting gain is recognised as a bargain purchase in profit or loss. 38

39 Goodwill However, before any bargain purchase gain is recognised in profit or loss, the acquirer is required to undertake a review to ensure the identification of assets and liabilities is complete, and that measurements appropriately reflect consideration of all available information 39

40 Business Combination Achieved in Stages (Step Acquisitions) Prior to control being obtained, the investment is accounted for under IAS 28, IAS 31, or IAS 39, as appropriate; On the date that control is obtained, the fair values of the acquired entity's assets and liabilities, including goodwill, are measured (with the option to measure full goodwill or only the acquirer's percentage of goodwill). 40

41 Business Combination Achieved in Stages (Step Acquisitions) As part of accounting for the business combination, the acquirer remeasures any previously held interest at fair value and takes this amount into account in the determination of goodwill as noted above. Any resultant gain or loss is recognised in profit or loss or other comprehensive income as appropriate 41

42 Business Combination Achieved in Stages (Step Acquisitions) The accounting treatment of an entity's precombination interest in an acquiree is consistent with the view that the obtaining of control is a significant economic event that triggers a remeasurement. Consistent with this view, all of the assets and liabilities of the acquiree are fully remeasured in accordance with the requirements of IFRS 3 (generally at fair value). 42

43 Business Combination Achieved in Stages (Step Acquisitions) Accordingly, the determination of goodwill occurs only at the acquisition date. 43

44 Business Combination Achieved in Stages (Step Acquisitions) EXAMPLE Entity A achieved 80% equity of B in 2 steps: Step 1: in 2010 Entity A purchases 15% equity, cash payment 100. Shares are posted in Assets available for sales : fair value between 2010 and 2012 was 20, posted in profit and loss,other comprehensive income; 44

45 Business Combination Achieved in Stages (Step Acquisitions) Step 2: In 2013 Entity A acquires a further 65% equity, cash payment 400. Fair values of assets (investments in B) amount to 300. Recognition and measurement of non-controlling interest in the acquiree: at the date of the achievement of control, fair value of 15% is 125, that is. 45

46 Business Combination Achieved in Stages (Step Acquisitions) In 2011 fair value to post in profit and loss : 1)Previously additional fair value in comprehensive income ( )= 20 2) Additional fair value ( )= 5 46

47 Business Combination Achieved in Stages (Step Acquisitions) In 2013 A posts a Goodwill Purchase cost of Acquisition: 400 Minority interest (20%x 300): 60 Fair value of investments before acquisition of control Fair value of net investments (300) Goodwill

48 Measurement period -Provisional Accounting If the initial accounting for a business combination can be determined only provisionally by the end of the first reporting period, account for the combination using provisional values. Adjustments to provisional values within one year relating to facts and circumstances that existed at the acquisition date. No adjustments after one year except to correct an error in accordance with IAS 8. 48

49 Related transactions and subsequent accounting General principles transactions that are not part of what the acquirer and acquiree (or its former owners) exchanged in the business combination are identified and accounted for separately from business combination; the recognition and measurement of assets and liabilities arising in a business combination after the initial accounting for the business combination is dealt with under other relevant standards, e.g. acquired inventory is subsequently accounted under IAS 2 Inventories. 49

50 Related transactions and subsequent accounting When determining whether a particular item is part of the exchange for the acquiree or whether it is separate from the business combination, an acquirer considers the reason for the transaction, who initiated the transaction and the timing of the transaction 50

51 Contingent Consideration Contingent consideration must be measured at fair value at the time of the business combination and is taken into account in the determination of goodwill. 51

52 Contingent Consideration If the amount of contingent consideration changes as a result of a post-acquisition event (such as meeting an earnings target), accounting for the change in consideration depends on whether the additional consideration is classified as an equity instrument or an asset or liability: 52

53 Contingent Consideration If the contingent consideration is classified as an equity instrument, the original amount is not remeasured If the additional consideration is classified as an asset or liability that is a financial instrument, the contingent consideration is measured at fair value and gains and losses are recognised in either profit or loss or other comprehensive income in accordance with IFRS 9 Financial Instruments or IAS 39 Financial Instruments: Recognition and Measurement If the additional consideration is not within the scope of IFRS 9 (or IAS 39), it is accounted for in accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets or other IFRSs as appropriate. 53

54 Contingent Consideration Note: Annual Improvements to IFRSs Cycle changes these requirements for business combinations for which the acquisition date is on or after 1 July Under the amended requirements, contingent consideration that is classified as an asset or liability is measured at fair value at each reporting date and changes in fair value are recognised in profit or loss, both for contingent consideration that is within the scope of IFRS 9/IAS 39 or otherwise. 54

55 Contingent Consideration Where a change in the fair value of contingent consideration is the result of additional information about facts and circumstances that existed at the acquisition date, these changes are accounted for as measurement period adjustments if they arise during the measurement period 55

56 Cost of an Acquisition Measurement Consideration for the acquisition includes the acquisition-date fair value of contingent consideration. Changes to contingent consideration resulting from events after the acquisition date must be recognised in profit or loss. 56

57 Cost of an Acquisition Acquisition costs Costs of issuing debt or equity instruments are accounted for under IAS 32 and IAS 39. All other costs associated with the acquisition must be expensed, including reimbursements to the acquiree for bearing some of the acquisition costs. Examples of costs to be expensed include finder's fees; advisory, legal, accounting, valuation and other professional or consulting fees; and general administrative costs, including the costs of maintaining an internal acquisitions department. 57

58 Cost of an Acquisition EXAMPLE Entity A achieves control in Entity B Payments conditions: 1. Immediate payment of 1.500; 2. An additional payment of 200 if, after 1 year EBIT is greater than An additional payment of 200 if, after 2 year EBIT is greater than 740 Consideration 2 and 3 are contingent, since they depend on EBIT: the sum of their fair value is 250. The total fair value is ( ) 58

59 Pre-existingexisting Relationship and Reacquired Rights If the acquirer and acquiree were parties to a preexisting relationship (for instance, the acquirer had granted the acquiree a right to use its intellectual property), this must be accounted for separately from the business combination. In most cases, this will lead to the recognition of a gain or loss for the amount of the consideration transferred to the vendor which effectively represents a 'settlement' of the pre-existing relationship. 59

60 Pre-existingexisting Reacquired Rights Relationship and The amount of the gain or loss is measured as follows: -for pre-existing non-contractual relationships (for example, a lawsuit): by reference to fair value; -for pre-existing contractual relationships: at the lesser of (a) the favourable/unfavourable contract position and (b) any stated settlement provisions in the contract available to the counterparty to whom the contract is unfavourable. 60

61 Pre-existingexisting Reacquired Rights Relationship and.however, where the transaction effectively represents a reacquired right, an intangible asset is recognised and measured on the basis of the remaining contractual term of the related contract excluding any renewals. The asset is then subsequently amortised over the remaining contractual term, again excluding any renewals. 61

62 Contingent Liabilities Until a contingent liability is settled, cancelled or expired, a contingent liability that was recognised in the initial accounting for a business combination is measured at the higher of the amount the liability would be recognised under IAS 37 Provisions, Contingent Liabilities and Contingent Assets, and the amount less accumulated amortisation under IAS 18 Revenue. 62

63 Contingentpaymentstoto employeesand shareholders As part of a business combination, an acquirer may enter into arrangements with selling shareholders or employees. 63

64 Contingentpaymentstoto employeesand shareholders In determining whether such arrangements are part of the business combination or accounted for separately, the acquirer considers a number of factors, including: -whether the arrangement requires continuing employment (and if so, its term), - the level or remuneration compared to other employees, - whether payments to shareholder employees are incremental to non-employee shareholders, -the relative number of shares owns, linkages to valuation of the acquiree, -how the consideration is calculated, and other agreements and issues. 64

65 Contingentpaymentstoto employeesand shareholders Where share-based payment arrangements of the acquiree exist and are replaced, the value of such awards must be apportioned between pre-combination and post-combination service and accounted for accordingly 65

66 Indemnificationassetsassets Indemnification assets recognised at the acquisition date (under the exceptions to the general recognition and measurement principles noted above) are subsequently measured on the same basis of the indemnified liability or asset, subject to contractual impacts and collectibility. Indemnification assets are only derecognised when collected, sold or when rights to it are lost 66

67 Other issues In addition, IFRS 3 provides guidance on some specific aspects of business combinations including: business combinations achieved without the transfer of consideration; reverse acquisitions; identifying intangible assets acquired ; 67

68 Disclosures Disclosure of information about current business combinations The acquirer shall disclose information that enables users of its financial statements to evaluate the nature and financial effect of a business combination that occurs either during the current reporting period or after the end of the period but before the financial statements are authorised for issue 68

69 Disclosures Among the disclosures required to meet the foregoing objective are the following: name and a description of the acquiree; acquisition date; percentage of voting equity interests acquired; primary reasons for the business combination and a description of how the acquirer obtained control of the acquiree. description of the factors that make up the goodwill recognised ; 69

70 Disclosures qualitative description of the factors that make up the goodwill recognised, such as expected synergies from combining operations, intangible assets that do not qualify for separate recognition; acquisition-date fair value of the total consideration transferred and the acquisition-date fair value of each major class of consideration; 70

71 Disclosures details of contingent consideration arrangements and indemnification assets details of acquired receivables the amounts recognised as of the acquisition date for each major class of assets acquired and liabilities assumed details of contingent liabilities recognised 71

72 Disclosures total amount of goodwill that is expected to be deductible for tax purposes details of any transactions that are recognised separately from the acquisition of assets and assumption of liabilities in the business combination information about a bargain purchase ('negative goodwill') 72

73 Disclosures for each business combination in which the acquirer holds less than 100 per cent of the equity interests in the acquiree at the acquisition date, various disclosures are required details about a business combination achieved in stages 73

74 Disclosures information about the acquiree's revenue and profit or loss; information about a business combination whose acquisition date is after the end of the reporting period but before the financial statements are authorised for issue. 74

75 Disclosures Disclosure of information about adjustments of past business combinations The acquirer shall disclose information that enables users of its financial statements to evaluate the financial effects of adjustments recognised in the current reporting period that relate to business combinations that occurred in the period or previous reporting periods. 75

76 Disclosures Among the disclosures required to meet the foregoing objective are the following: details when the initial accounting for a business combination is incomplete for particular assets, liabilities, non-controlling interests or items of consideration (and the amounts recognised in the financial statements for the business combination thus have been determined only provisionally); follow-up information on contingent consideration; 76

77 Disclosures follow-up information about contingent liabilities recognised in a business combination; a reconciliation of the carrying amount of goodwill at the beginning and end of the reporting period, with various details shown separately. 77

78 Disclosures the amount and an explanation of any gain or loss recognised in the current reporting period that both: (i) relates to the identifiable assets acquired or liabilities assumed in a business combination that was effected in the current or previous reporting period, and (ii) is of such a size, nature or incidence that disclosure is relevant to understanding the combined entity's financial statements. 78